The Commodities Feed: OPEC + Should Accept Increase in Production | Break


Energy

The oil market has experienced an impressive recovery since mid-December. Brent crude rebounded more than 10%, pulling the market a striking distance from the US $ 80 per barrel level. There are a few drivers that have helped push the market higher. First, there is a growing belief that while the Omicron variant is more heritable than previous variants, it is less lethal. This has helped allay some demand issues, although we need to see how governments around the world respond as cases increase in their countries. Much attention will be paid to China, and whether it can continue to pursue its zero covid policy if we see it as a surge in cases.

Second, the supply disruptions have also been favorable. Libya’s largest oil field, Sharara, was shut down by militias and production fell to around 350 Mbbls / d. In addition, repair work on a damaged pipeline is expected to result in a further drop in production of 200 Mb / d, according to Bloomberg reports. These drops more than offset the increase in the agreed supply from OPEC + members in January.

The recovery in the oil market and the cautiously optimistic demand outlook suggests that OPEC + will continue to increase supply. The group is due to meet later today to decide whether to increase production by 400 Mbbls / d from February. The expectation is that the group will stick to the deal. Any deviation from this would be a surprise to the market.

The natural gas market experienced an extremely volatile period during the holiday season. European gas prices hit record highs in December (climbing up to 88% at one point). The catalyst for this decision was the reduction in Russian flows to Europe, especially along the Yamal pipeline. In fact, the gas flows along the pipeline moved east from Germany to Poland rather than the usual flows to the west. The LNG market has helped allay concerns in the European market. The increased flow of US LNG to Europe saw prices towards the end of December return all of the gains made earlier in the month. However, Asian LNG spot prices are now back at a premium relative to Europe, suggesting that the trend for stronger LNG flows to Europe is likely to slow. And in the absence of a resumption of Russian flows, the prices of hubs in Europe should remain well supported. European gas storage is currently around 56% full, compared to a five-year average of around 71%.

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